Demonetisation: Cause and Effect

Monday 27 February 2017

A Two-part Article on Demonetisation-II

The following is the concluding part of a two-part article on demonetisation written by the prominent Marxist-Maoist thinker, Kobad Ghandy, and sent to us for publication in this journal from the Cherlapalli Central Jail, Medchal district, Hyderabad where the author is currently detained. The first part, which explained that fighting black money was not really the main goal of the government, appeared in Mainstream (February 18, 2017). This second and concluding part explores the real objective of demonetisation and the disastrous impact it has had on the economy as a whole and the lives of the masses, while calling for a rethink of the economic policies. It must be pointed out that this article was sent to Mainstream on Janaury 24, 2017, that is, before the Budget was presented in Parliament by the Union Finance Minister on February 1, 2017. —Editor

Having seen in Part-I of this two-part article that the actual cause of demonetisation was not really ferreting out black money, let us turn to the real causes for demonetisation. And, in the process, let us also look at its effects on the economy and the lives of the people.

As mentioned in Part I, it was not the demone-tisation per se that caused the havoc all around; it was the way it was done to achieve its real goals that resulted in all the problems. For the government, bailing out the banks was an urgent necessity; pushing digitalisation was part of an international plan being hatched since the last one year. But neither required such a drastic action as overnight demoneti-sation of 86 per cent of the nation’s currency, specifically when combined by a refusal to disburse sufficient new notes.

Many banks around the world are also in a poor state due to high bad debts, but none has resorted to demonetisation. Generally, only when a country faces hyper-inflation and a run on their banks that they resort to such desperate measures. But for such reasons there is no need to restrict the new notes which are prepared well in advance.

Even to push digitalisation, there was no need for such a desperate measure with such draconian restrictions on cash withdrawals that caused such havoc with the lives of crores. No doubt this shock therapy gave such a boost to the digital companies that they never even dreamed of. But at what cost to the nation? Digitalisation, for which there was no real urgency, could have been introduced in a more gradual and planned way, rather than being pushed down our throats by creating an artificial scarcity of cash.

In this second part of the article we shall view how demonetisation (together with restricted circulation of new notes) helped achieve the two real goals intended by the government. Finally we shall also see at what cost this was achieved, vis-a-vis the rest of the economy and impact on people’s lives.

The PSU Banks’ Bail-Out

Forbes magazine had this to say about India’s demonetisation:

“India’s government perpetrated an unprece-dented act that is not only damaging its economy and threatening destitution of its already poor citizens, but also breathtaking in its immorality... What India has done is commit a massive theft of people’s property without even a pretense of the due process...”

But, it appears that this bitter medicine of demonetisation was administered as India’s PSU banks were in the ICU due to spiralling NPAs (bad debts) of the big corporates. They required urgent blood tranfusion of funds to survive. In the last financial year the BJP Government pumped in Rs 20,000 crores of taxpayers’ money and in June 2016 another Rs 23,000 crores.

But this was far from being sufficient. Besides, how much longer would the taxpayers tolerate their hard-earned money being used to bail out defaulters? After all, the bad debts were huge. Moody’s reported that Indian banks had bad loans worth Rs 6 lakh crores and they required a minimum and immediate capital infusion of Rs 1.25 lakh crores. Credit Suisse reported in its ‘House of Debt’ report that the total debt of just the top 10 business houses was a massive Rs 7.32 lakh crores. French Financial Services major BNP Paribas in a report said that 16 per cent or $ 178 billion (Rs 12 lakh crores) of corporate credit in India was at risk of default, making the domestic banking system the worst in Asia.

In addition, because of the corrupt nexus of banks-politician-big corporates, NPAs have been growing at a massive rate. They grew by 60 per cent in the 2013-15 period, while between 2004 and 2012 they rose by just four per cent. Why did these banks continue lending to these corporates thousands of crores when many could not (or did not) even pay the interest on them? The PSU banks’ bad loans are now estimated at Rs 11 lakh crores.

Coupled with these rising bad debts the PSU banks have been witnessing a hige fall in bank deposite resulting in significant losses. In 2015-16 the growth in bank deposits fell to a 53-year low. For the first time growth rates reached single digit figures. So, in Quarters 3 and 4 of the financial year 2015-16 all PSU banks were piling up losses varying from Rs 1500 to Rs 3500 per quarter and Punjab National Bank posted the biggest ever quarterly loss by an Indian bank in the October-December 2015 quarter of Rs 5367 crores.

And these only kept rising through the year. The situation became so precarious that in July 2016 the government received a proposal to take Rs 4 lakh crores from the RBI to recapitalise the banks. Though economists were staunchly opposed to this, the government by then, anyhow, had different plans.

So, instead of liquidating the assets of the big corporates to recover their bad debts, the PSU banks seized huge amounts from the people through demonetisation. And by introducing draconian restrictions on withdrawals, the PSU banks were able to hoard a high percentage of these funds. By regularly changing the rules for withdrawal, even at the cost of enormous harassment to the people, it was able to restrict withdrawals to a minimum.

The fact that the RBI Governor has been giving vague answers even before a Parlia-mentary Committee and refusing to reply to RTIs goes to show that everything was not above board. He claims he neither knew the amounts of old notes deposited till December 31, 2016, nor the amounts of new notes disbursed, nor the way in which they were disbursed. He also says there are no minutes/records of meetings that decided on demonetisation. How could such a major decision, impacting the lives of every single person in the country, have been taken so informally, with no proper records maintained? It is totally unbelievable; there is obviously much to hide. And there is no explanation as to why restrictions on with-drawals, though eased, still remain in force even 70 days after demonetisation.

Unofficial reports say that till December 31, 2016 about Rs 15 lakh crores was seized and a mere Rs 6 lakh crores disbursed. That gives banks an excess of Rs 9 lakh crores, most of it in low interest savings and current accounts. Though the figure now (on January 20), according to the RBI, is put at Rs 9.2 lakh crores disbursed, it still leaves large amounts with the banks. Even this figure is disputed by the SBI, which says it is only Rs 7 lakh crores. But unless this huge stash of money is given out as credit, the banks will not be able to realise the profits. That is why the PM announced big concessions on interest on housing and other loans, to facilitate the credit offtake. Besides, the banks themselves have reduced interest rates by nearly one per cent—a longstanding demand of the corporates. In addition the leap in income from digital transactions will also assist banks cut their losses.

The government may have temporarily bailed out the banks but the high corporate debts continue to loom large!!

Towards a Digital Boom

In his first speech on demonetisation, the PM did not say a word on ‘cashless economy’. He did not really need to as with no cash in the people’s hands and ATMs non-functional, the people were forced into the digital mode. In the week after November 8, 2016 Paytm hit a peak of seven million transactions a day and Mobiweek five million. In just one month after demonetisation Rupay card transactions increased by 503 per cent per day and e-wallet transactions by 271 per cent.

But slowly the issue of ’cashless economy’ was made central by both the PM and FM. By early December not only the Central Govern-ment but many State governments were aggre-ssively promoting it and so was the media. On December 9, 2016 the government introduced 11 concessions for digital payments and stated that the 4.8 crore Kisan Credit Card holders will all get RuPay cards for cashless payments. On December 21 the government passed an ordi-nance making it mandatory for small businesses to pay through banks and not cash. To try and push digitalisation to even those without mobiles the PM announced the BHIM scheme linking Aadhar cards to digital payments. Finally, the government set up a high-powered committee to aggressively promoe digital payments comprising of Chief Ministers, and top officials of the RBI, bank and Niti Aayog. What was even more ridiculous, the government announced a sort of lottery scheme costing about Rs 350 crores to gift the winners prizes from amongst digital users.

Never before in the history of India has a government so blatantly promoted the interests of private companies, and that too mostly foreign. And why the need to bulldoze payments through digital transactions and spend such huge amounts for its promotion when the government is unable to supply even regular electricity to most areas, or for that matter even water, food, health care and education? Besides, these payments come at a heavy cost to the common man, for what was earlier free. In all the hysterical publicity not a word is mentioned on the transaction costs, merely on the facility. To take an example, assume a Rs 100 note is circulated one lakh times. There is no extra cost in doing these transactions. But if the same Rs 100 is transacted through digital payments, an extra Rs 2 lakhs would have been paid by the consumers (assuming a transaction cost of two per cent). This huge amount would have been extracted from the consumers and shared by the banks and digital companies.

And the figure could be far more as the charges are totally unregulated. This the petrol pumps discovered to their horror when one per cent was arbitrarily deducted from each payment after January 1. In fact small traders say they do not want to apply for card machines as they say banks charge anything from two per cent to five per cent for each transaction. There is no fixed rate and traders have to bargain with the banks. What is more, it is quite clear that these banks are known to cheat. For example, an employee here said as he had no cash he bought two bottles of beer through his debit card. The actual cost was Rs 200 but Rs 210 was charged, that is, a five per cent commission when the actual commission was two per cent. Of course, he did not complain, and anyhow there is no mechanism to recover the amount cheated.

In fact these digital payments are being pushed through at a reckless pace with no proper infrastructure or security in place. The media is already full of stories where tran-sactions do not take place smoothly due to internet speeds, and enormous inconveniences faced and losses incurred with cases of cyber attacks, phone robbery, passwords exposed etc.

India is 96th in the world in terms of download speed and 105th in terms of bandwidth availability. In fact India ranks below Nepal, Bangladesh and even Iraq in download speed. In this South Korea ranks 14th, the US 21st, Russia 19th, China 34th, Australia 46th, Nepal 90th, Bangladesh 91st, Iraq 95th and India 96th. In internet connection speed India’s is just 4.1 Mbps, compared to 5.7 for China, 7.5 for Malaysia and 20.1 for Hong Kong.

Then there is the huge question of cyber security. When this is afflicting even the developed countries that have spent extensively on cyber security, one can imagine the situation here where virtually nothing has been done. Already last October 3.2 million debit cards were hacked in India. Here there is no security standard or any e-wallet law. The RBI circular does not prescribe any minimum standards of security in case of fraud or loss that occurs due to lack of security measures. The police are already complaining of getting complaints of a large number of cards being drained of funds and unable to do much. Let alone arrest the culprits, they say it is even difficult to recover the funds due to poor response from banks and digital companies. While the government is spending thousands of crores to promote digital payments, it spent a mere Rs 100 crore on R&D on cyber security last year. And over and above all these threats to the customer, there is a huge national security threat as minute details of crores of Indians would be accssible to the digital corporations, most of which are US.

But why this mania to push digital payments and that too at this break-neck speed? Why do we not find a similar enthusiasm to provide food, water, clothing, shelter, health care etc. etc. to our suffering millions? Do we have Marie Antionettes, who know nothing of the ground reality, ruling us? The PM proudly states that the BHIM scheme requires only the thumb impression and can be operated by any illiterate, but already the Google App store is flooded with fake BHIM apps.

It just would not make any sense as to why this would become the de facto main agenda in a poverty-stricken country like India. But, if we read between the lines this apparently Tughla-qian scheme has a sinister design behind it, linked to an agenda by the giant IT conglo-merates of the US. While the government has been preoccupied in already opening out the Indian market to US products—like arms, planes, cars etc. etc.—it is now the turn of the IT giants to flex their muscle. After all, in today’s world the modern day robber barons are the giant IT companies.

It was on June 9, 2015 that the Google Chair-man, top global bankers and G-7 and G-20 leaders met in Austria to hasten the process of going cashless. India was particularly targeted due to its potential. In early 2016 Google made a proposal to India’s IT Ministry to push its project ‘Loon’. In the light of the Strategic Partoership Agreement signed between the two countries, a number of meetings were held between USAID (United States Agency for Industrial Development), the RBI Governor and Finance Ministry. The key focus was to push digital payments. In this regard, in January 2016 the USAID presented a report to the government “Beyond Cash”, its essence being to use external pressure to expand digital pene-tration in India.

According to the website, Asia Pacific Research dot com, just one month before November 8, 2016, USAID formed a new outfit ‘Catalyst’ to promote digital payments in a comprehensive way in India. On October 14, 2016 it issued a press statement: “Catalyst is a milestone in the universal economic consoli-dation between USAID and the Finance Ministry of India.” Alok Gupta, the CEO of the Washington-based World Resource Institute, was the main promoter. And the CEO of Catalyst was one Badal Mallik who worked as the Vice-President of the online payment company, Snapdeal. Involved in the negotiations were 35 world institutions including USAID, IMF, Visa, Mastercard, Gates Foundation, Google, E-Bay, Precharge, Snapdeal, Paytm etc.

No doubt demonetisation was the “external pressure” USAID spoke about to give digital payments a major push in India. Even before demonetisation, income through digital pay-ments was expected to leap from Rs 8000 crores in 2015-16 to a massive Rs 68,000 crores ($ 10 billion) by 2020. Already of the 77 crore debit/credit cards in India, the US companies Master-card and Visa account for 20 crore and 24 crores respectively. Hardly was the demonetisation process over when the Google chief was in India with Central Ministers falling all over him, offering India’s 51 million small and medium businesses to him, not to mention the additional 100 million shopkeepers.

It is one thing to allow digital payments, and even facilitate it through enhanced internet speed and cyber security for those who can afford it; it is quite another matter to force it down everyone’s throat through draconian measures like demonetisation, ordinances and government fiats. After all, these IT corporations are extremely powerful—today of the 10 largest corporations in the world, six are linked to the internet business: Google, Microsoft, Apple, Amazon, AT&T and Facebook. These have a net worth of $ 2.6 trillion, more than India’s GDP. According to John Naughton’s new book, these digital moghuls are the new age “robber barons”. With the present initiatives of the government they have tasted blood, and these man-eaters are also set to pounce on the Indian people, with even most State governments falling in line. Not surprisingly, the IMF and Obama have been ecstatic about India. After all, which country would cause such havoc to its own economy, own currency and its own people so that these giants, including Reliance, can make a killing?

The costs to the nation have been devastating.

Demonetisation and Economic Destruction

With the Budget expected soon and elections in many States, we can expect the government to give a bright picture through statistical mani-pulation. The government has anyhow been prone to using such methods to make black appear white. Even in the midst of demoneti-sation when the entire country was reeling under misery, the Finance Minister appeared on TV, stating there was no economic crisis and quoted rising tax figures to prove it. He forgets that this is little indication; after all, so did British tax collections rise even during the Great Bengal Famine. And there is nothing great in increasing excise collections by continuously raising petrol/diesel rates burdening the middle classes and farmers!! But more on these manipulations later, let us look at the ground realities as a result of demonetisation.

In a State like UP where already 40 per cent are below the poverty line, it is estimated that through demonetisation the vast network of small-scale industries have been pushed back by at least two decades and lakhs have lost their livelihood. With an estimated 30 per cent of the country’s workforce, a huge number of people are dependent on handloom, handicrafts, leather and leather products, brasswork, sheet metal wares, aluminium art works, woodwork and glassware, sports-related industry and music instruments segment, pottery etc. Moradabad alone exports brassware and other metal ware work worth Rs 40 lakh crores a year. All these labour-intensive industries have been badly hit.

But not only in UP, throughout the country we find a similar situation—the diamond business employing 10 lakhs is in crisis; Ludhiana’s famed hosiary business is down by 70-80 per cent even in the peak winter period; transportation is down by 50 per cent, the worst hit being owners with a few trucks; all the powerloom centres are functioning at barely 30 per cent with lakhs returning to their villages; the poultry sector worth Rs 1 lakh crore was losing Rs 100 crores per day; the reality sector dropped by 65 per cent hitting the construction sector hard etc. etc.

According to Mohan Guruswamy, at least 22 crore daily workers have suffered loss of jobs. In addition, lakhs of small farmers (70 per cent of the total) have been badly hit, unable to realise kharif crop sales and unable to sow the rabi crop effectively due to lack of cash to purchase inputs and pay labour charges. Conditions were so bad that vegetables were rotting with vendors and wholesalers. Lakhs and lakhs of petty vendors and roadside stalls were out of business. And while neighbourhood stores were collapsing, Big Bazaar-type super-markets recorded a 20 per cent growth in sales during demonetisation. The GDP growth is expected to be hit by as much as two per cent.

This crisis of cash has spiralled into affecting the bulk of the economy with FMCG sales contracting by 1.5 per cent in November and vehicle sales in December falling to a 16-year low (contracting by 19 per cent). The CMIE says investment proposals dropped to half (Rs 1.26 lakh crores) in the October-December 2016 quarter as against the average of new invest-ments seen in the previous nine quarters (Rs 2.36 lakh crores).

But these statistics do not bring out pain at the human level. Imagine farmers after facing two years of drought found the impact of a good monsoon negated by cashlessness; imagine the families of crores of labourers, artisans, weavers etc., who are dependant on their pitiable daily wages, suddenly without any job or cash; imagine the lakhs of vendors stuck with their rotting vegetables and foodstuff; and even imagine a large section of the middle classes unable to purchase milk for their children, medicine for the sick or even vegetables for the household meal! And finally not to mention the lakhs of youth who had to postpone weddings! At the ground level it was a nightmare for most. And over and above all this, for all to stand endlessly in queues for hours, nay days, to get either a pittance or nothing at all! Besides the pain and even death of many an elderly, the gigantic loss to the economy in mandays wasted in merely queuing up, instead of spending in productive activity would itself be incalculable. Even a war may not have had such a destructive impact on the economy and people’s lives. But many suffered it, thinking mistakenly it was in the long-term good of fighting corruption and black money.

Notwithstanding this destruction all around the govenment is bound to whitewash the negative impact in the coming Budget. As they have anyhow been doing this all along, can one expect anything different now, specifically when there has been so much criticism of demoneti-sation?

The myth of India being the fastest growing economy in the world, promoted even by the likes of the IMF (it did the same for Greece and other countries before the collapse) and others, has been deflated by the CMIE data. They pointed out that the 7.6 per cent growth for 2015-16 contained a 2.4 per cent accounted for by an item called ‘discrepancies’ in CSO statistics. The actual growth was 5.2 per cent. Then again manufacturing was shown as having grown by 8.1 per cent which was not matched by the growth in IIP (Index of Industrial Production) which was only 2.4 per cent.

They even tried desperately to trick Moody’s to get a better rating. Moody’s rated India at the Baa3 level—the agency’s lowest notch for debt considered investment grade. Throughout October 2016 the Finance Ministry sent letter after letter to try and convince them to give a better rating. This failed to convince them and they affirmed the Baa3 rating in November 2016.

With the damage already done, it would be better to look the reality in the face rather than live in a make-believe world. Today, when most countries are seeking to protect their own markets and people, the Indian Government is opening India out to the ravages of US corporations. That too at a time when the US is planning an entry tax on Indian pharma-ceuticals and preparing the kick out Indian IT professionals (H-1B visas) so that locals can get jobs. Having tied the Indian economy to Western chains, the economy is heading for recession what with crude oil prices rising and the Fed set to increase their interest rates. There is a need to rethink economic policies before the situation spirals out of control. Meanwhile corruption needs to be rooted out at the top level as in South Korea, as the bulk of the black money is with those elements.